Performance Assets Trend and Investment Mentality - Private Banking in China, Episode III

Updated: Mar 31

China has accumulated a tremendous amount of wealth over the past decades, making it one of the fastest-growing economies in the world. A steady stream of a new wave of highly educated high net worth individuals (HNWI) demands higher standards of wealth management service. The allocation of assets has become more diversified to cope with market volatility (see Allocation of the investable assets of Chinese HNWIs, 2015-2019).

Brief Description of Performance Assets Classes


Cash & Deposits:

In 2017 and 2018, the People’s Bank of China (PBoC) imposed a monetary policy to curb financial leverage, seeking a “stable leverage” financial system. The policy would continue to reduce financing costs and ease liquidity.


Real Estate Market:

In 2017 and 2018, real estate policy was tightened due to new regulations and urban redevelopment projects. The market growth slowed and began to stabilize in Tier 1 and 2 cities.


Stock Market:

China A-shares performance remained volatile driven by speculative behavior from retail investors. During the pandemic year 2020, the A-share market became less volatile compared to the previous years. Consumer behavior would be one of the key factors to portfolio performance analysis in the future.


Mutual Funds:

The capital markets drove the growth of mutual funds. The growth rate slowed mainly due to reserve ratio reduction.

Bank Wealth Management Products:

The regulation of bank wealth management products has strengthened due to “deleveraging” initiatives. Bank financial products were projected to issue fewer in volumes.


Insurance:

The insurance industry grew slowly due to the new regulations. Investors are looking for long-term insurance products for declined interest rates.


Other Domestic Investments:

Private securities investment funds shrank due to market fluctuations. The private equity investment faced strict IPO approvals. The establishment of the Science and Technology Innovation Board would boost the private equity market by offering financing and an exit channel. Fintech investments declined due to credit checks.

Overseas Investments:

Despite the global capital markets continuing to pressurize, the U.S. and the EU introduced liquidity-easing policies, allowing room for investment environment improvement.


High Net Worth Individuals (HNWI) Mentality


According to Bain’s 2019 survey, senior/middle management and professionals accounted for 36% of the total HNWI. Industrials are transforming at a rapid pace with the assistance of digital technologies. The rapidly changing environment incentivizes the highly educated and seasoned professionals to focus on risk management and avoid aiming for high-risk wealth investments.


New industry business leaders from IT, new materials, new energy, telemedicine, etc., grew with a better understanding of industry trends and financial markets. Having strong expertise in wealth management becomes a key indicator of what the senior executives are looking for in a wealth manager. In terms of banking service selection criteria for making investment decisions, HNWIs favor expertise more than “brand name”. The mention for liquidity management increased in senior executives HNWI than all HNWI as the senior executives HNWI realized to take advantage of investment opportunities as soon as possible.


As a result of the black swan event, COVID-19 in 2020, the global economies suffered. Investors and policymakers would likely seek a different approach to investing due to unforeseen risks like pandemic, politics, or climate change. The wealth management institutions are higher in demand to help HNWIs with wealth preservation in the long term. The wealth objective has gravitated from accumulation to preservation and inheritance (see Wealth objectives of HNWIs, 2009-2019). The risk aversion investing behavior makes HNWIs more tolerant of smaller and lower risk returns in diverse asset classes. HNWIs now tend to hold more cash and decrease investment in private equity funds and some other domestic investments.

Production Selection:

Pinpointing high-quality investments becomes more difficult in the turbulent market environment and age of information overload as shown in a decrease in private equity investment. From 2017 to 2019, PE investment allocation has drunk about 5%. However, there is hope for PE investment to recover in the short term.

Asset Allocation:

HNWIs seek private banks to reduce risk by maintaining a dynamic and diversified portfolio to maximize overall returns.


Risk Control:

In addition to asset diversification, various investment characteristics analyses help to strengthen risk control. Fintech and advanced technology are favored by the HNWIs for in-depth analyses.


Customer Service:

Digital services in China have grown tremendously in the past decade. HNWIs would have high expectations in smart and agile wealth management services. The use of robo-advisor would HNWIs to understand the product and market.


In the long term, the complexity and volatility of the market drive more HNWIs to plan inheritance and tax early. Family trusts grew significantly as HNWIs would prepare wealth for their children to build upon. HNWIs shift focus on domestic investments due to the influx of foreign investments, expecting A shares to recover. HNWIs would take a prudent approach to invest due to market and political uncertainties in the future.


In the next and final episode, we will conclude with a discussion on the competitive landscape and implications for the future of China’s private banking sector. If you are interested in the future trends and insights of China's private wealth market, please subscribe to our newsletter or follow our WeChat public account.